Are banks rewarded for financial consumer protection? Evidence from a quasi-natural experiment

Abstract

We investigate whether banks benefit from financial consumer protection. Exploiting the difference-in-differences approach based on a policy mandated for Chinese banks and entropy balancing matched sample, we document an increase in non-performing loans and a decrease in total income following the implementation of the policy for opaque banks relative to transparent banks. Decomposition exhibits a decrease in interest income and an increase in non-interest income. The effect is more pronounced for banks with higher ex-ante profits. Our results suggest that financial consumer protection benefits opaque banks’ non-traditional business but harms their traditional business, especially for those with larger customer bases.